by Douglas Plume, RBFL Student Editor
Since its founding in 1974, the Commodity Futures Trading Commission has had authority to regulate conduct in the markets for futures contracts of all sorts of commodities. Congress greatly expanded the CFTC’s authority and power in a number of ways with the passage of the Dodd-Frank Act in 2010, in the wake of the 2008 financial crisis. Dodd-Frank gave the CFTC power to regulate financial derivatives, as well as futures and options contracts for physical commodities. (A “derivative” is a financial instrument that derivesits value from the performance some underlying asset or index; a “futures contract” is a tradable, standard-form agreement to buy or sell a commodity at a certain fixed price, to be paid for and delivered later; an “option contract” is an agreement allowing the holder of the option to buy a commodity at a certain fixed price before a certain expiration date.)
The Dodd-Frank Act also expanded the CFTC’s anti-fraud authority in two important ways: (1) by allowing the Commission to bring an enforcement action whenever it could allege conduct by a regulated entity that was deceptive, even if that conduct did not result in market manipulation; and (2) broadening the CFTC’s anti-fraud authority to cover “a contract of sale of any commodity in interstate commerce.” 7 U.S.C. § 9(1) (2018). The CFTC in July 2011 issued a Final Rule delineating the type of deceptive and manipulative conduct it would prohibit. The Commission indicated in its preamble to the Rule that it intended to interpret its scope broadly, in harmony with the statutory text.
This development went little noticed by commentators, probably because until very recently the CFTC’s anti-fraud enforcement actions had been confined to cases of alleged market manipulation or transactions involving futures contracts that were traditionally within the CFTC’s scope.
In September 2017, the CFTC brought an enforcement action against Monex, the operator of an unregistered online platform that allowed individual investors to buy and sell positions in precious metals on margin. The CFTC alleged that Monex had engaged in deceptive conduct in violation of the anti-fraud statute, 7 U.S.C. § 9(1), because it had made deceptive statements to customers about the value and security of their investments. Approximately 90 percent of the Monex account with leveraged positions in precious metals lost money between 2011 and 2017, despite statements from Monex representatives to the effect that customers’ precious metal investments “will always have value.”
The district court dismissed the action, finding that the CFTC’s anti-fraud provision allowed it only to regulate conduct that was both deceptive andmanipulative. The CFTC appealed, and the Court of Appeals for the Ninth Circuit reversed the district court in an opinion handed down in July.
The Ninth Circuit concluded that the Dodd-Frank Act’s purpose was to give the CFTC broad remedial powers to ferret out and prohibit conduct that was deceptive and harmed consumers, even when that conduct did not result in market manipulation. Monex also argued that it shouldn’t be subject to the CFTC’s jurisdiction because it was not selling futures, but was instead allowing consumers to buy actual metals on margin. The Ninth Circuit noted that 7 U.S.C. § 9(1) was broadly written, to cover commodities sold on margin, as well as “a contract of sale of any commodity in interstate commerce,” the court did not address whether the CFTC could regulate all sorts of deceptive conduct in “spot” transactions, where customers paid cash and the commodity was delivered “on the spot.”
The ultimate outcome of the CFTC’s enforcement action against Monex remains uncertain, but it seems likely that the Commission could use this case as a test case for future enforcement actions against, for example, cryptocurrency changes. The CFTC has declared that cryptocurrencies are a commodity subject to its jurisdiction, and so far, a few federal district courts have agreed. The Monexdecision will be another arrow in the CFTC’s quiver, allowing it to prohibit and fine conduct that falls well short of common-law fraud.
The Trump Administration has taken a fairly laissez faireattitude toward financial regulation, but the CFTC’s anti-fraud statute and its accompanying regulations have few guardrails that cabin the Commission’s enforcement power. A future Administration could use the CFTC’s anti-fraud power to fine and to punish all sorts of sellers engaging in arguably deceptive or harmful conduct. The CFTC’s anti-fraud provision does not require that the allegedly deceptive statements be made with any specific intent to defraud consumers, so any companies that sell products that are poorly understood by consumers and that engage in advertising to lure in new buyers could potentially be subject to sweeping enforcement actions by the CFTC.
Commodity Exchange Act, 7 U.S.C. §§ 1-27f (2018).
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (codified as amended in 15 U.S.C. and other titles).
CFTC v. Monex Credit Co., 931 F.3d 966 (9th Cir. 2019).
CFTC v. Zelener, 373 F.3d 861, 866–67 (7th Cir. 2004).
Chicago Board of Trade v. SEC, 187 F.3d 713, 715 (7th Cir. 1999).
CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492 (D. Mass. 2018).
CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018).
CFTC v. Monex Credit Co., 311 F. Supp. 3d 1173 (C.D. Cal. 2018).
In reCoinflip, Inc., CFTC No. 15–29, 2015 WL 5535736 (Sept. 17, 2015).
Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41,398 (Jul. 14, 2011) (codified at 17 C.F.R. pt. 180).
Tyce Walters, Regulatory Lies and Section 6(c)(2): The Promise and Pitfalls of the CFTC’s New False Statement Authority, 32 Yale L & Pol’y Rev. 335, 335–36 (2013).
- Holland West & Matthew K. Kerfoot, The Impact of Dodd-Frank on Derivatives, 18 Fordham J. Corp. & Fin. L. 269, 272–75 (2013).
Allen Kogan, Comment, Not All Virtual Currencies Are Created Equal: Regulatory Guidance in the Aftermath of CFTC v. McDonnell, 8 Am. U. Bus. L. Rev. 199, 211–15 (2019).
Leida Slater, Note, The Commodities Game Has a New Referee, 52 Chi.-Kent L. Rev. 438, 440 (1975).
Theodore M. Kneller, Jonathan Marcus, Daniel O’Connell, & Mark D. Young, Skadden, Arps, Slate, Meagher & Flom llp, Ninth Circuit Holds CFTC Dodd-Frank Enforcement Authority Allows Fraud-Only Claims, JD Supra (Jul. 31, 2019), https://www.jdsupra.com/legalnews/ninth-circuit-holds-cftc-dodd-frank-30420/ [https://perma.cc/25CL-9GLM].